The Importance of Income Tax Planning

The Importance of Income Tax Planning

May 19, 2023

What is the rate of tax you will pay on a Roth IRA conversion? How much will you save in taxes by gifting money from your IRA to charity? Should you fund a 401(k), IRA or Roth IRA? Which accounts should you draw from first in retirement?

The answer to these questions come from one place – income tax planning. At Whitford Financial Planning, we do not limit diversification to investing, we also diversify to minimize taxes. Tax diversification involves allocating investments across accounts and investments that are taxed differently.

We determine what is called your Tax Allocation Summary, that is the allocation of your accounts between taxable, tax-deferred and tax-free assets. Once you know your starting mix, we generally help you to build towards a larger tax-free allocation, although the best timing for such moves may be years into the future when you are projected to be in a lower tax bracket.

We request your latest federal income tax return, paystubs, and other possible income changes in order to prepare a tax projection. Gathering this data is critical to an accurate evaluation of your circumstances in order to recommend tax minimization strategies. It may also be important to connect with your CPA or tax preparer during the year to make sure we are all on the same page.

Reducing income taxes now and in the future is the clear purpose of tax planning. It can also give you more flexibility and options for using your assets as the economy and tax laws change.